Paxton may have overpaid for Herald-Sun

$125 million considered almost twice the value of the newspaper

It's a little easier to understand why Paxton Media LLC came into the offices of The Herald Sun last Monday with the ax swinging when you know how much they overpaid for the paper. Sources inside the news industry say the Paducah, Ky.,-based media chain paid $125 million--almost twice what analysts had estimated the 50,000-circulation daily was worth. Both The Herald-Sun and Paxton are private companies that do not disclose their financial records to the public. People involved in the sale of the paper have signed non-disclosure agreements and are not free to confirm the price or the bidding process.

However, pieced together from a number of sources, a scenario emerges--one that should be familiar to anyone who's ever bid on eBay: A handful of interested parties take a look at an attractive piece of property--in this case, a nationally recognized newspaper in a growing market full of educated, affluent readers. Just before the bids are in, another player enters the game, one with deep pockets, whose collection overlaps with your own. You bid high--high enough, you hope, to shut out your competitor. Higher, it turns out, than anybody else. To top it off, you find out your rival didn't bid after all.

The rival in this case was Media General, a Richmond, Va.,-based chain with 25 daily newspapers in the Southeast, including eight North Carolina papers, among them the Winston-Salem Journal. Media General representatives have publicly confirmed that they did look at the paper but did not place a bid. Both companies are actively acquiring newspapers in the Southeast, and most of Paxton's 29 newspapers are in the Southeast and Midwest, including seven in North Carolina. Media General representatives couldn't be reached for comment.

Owen Van Essen of Dirks, Van Essen & Murray, the brokerage firm that handled the sale, says there was nothing unusual about the bidding process. He denies any suggestion that Media General was brought in at the last minute to drive up the bid. "Media General is not part of this story except for what they've said publicly," Van Essen says. "Half of the people who come in and visit don't bid, and in this case the percentage was much, much lower because it was such an attractive opportunity."

Sources say that nine companies visited Durham in late October and early November; they were treated to lunches, given tours of the city and offered copious information about the finances and business strategy of the company. These meetings were kept intensely secret, however, and often happened off-site. The sight of suited men visiting the office along with the company's top brass tipped off employees to the fact that the newspaper was for sale. Rumors were rampant. But the E.T. Rollins family, which owned the paper for 109 years, stayed completely silent on the matter until the sale was announced Dec. 3.

Media General representatives' visit on Nov. 1 was the last to be scheduled. Shortly afterward, prospective buyers were invited to place one bid. One of the bidders was McClatchy, the Sacramento, Calif.,-based chain that also owns the N&O. "It was a coveted newspaper and there were many interested parties," says Gary Pruitt, McClatchy's CEO.

Each prospective buyer was given a prospectus created by Dirks, Van Essen & Murray. The document contained extensive financial information along with market comparisons.

"What the comparison showed was that the newspaper was substantially overstaffed," says Van Essen.

The prospectus also downplayed competition from the N&O. "My recollection is that the Raleigh paper had 10- or 12-percent daily penetration in Durham County," Van Essen says. "The Durham paper dominates Durham County, which is its primary market."

The underlying message of the prospectus was clear: This is a good newspaper in a great market, but it's not living up to industry standards. A new owner could easily turn that around in a very short time by laying off staff.

Van Essen would not confirm that characterization, but he noted, "It is safe to say that every party that visited the operation left believing they could make immediate and substantial improvements to the newspaper. By improvements, I mean, financial improvements to the bottom line of the newspaper."

Original estimates of the paper's market worth were in the $70- to $75-million range. John Morton of Morton Research cited that figure in the paper's own Dec. 3 article announcing the sale, based on the circulation numbers and competition from TheNews & Observer in Raleigh.

Asked whether $125 million would be a reasonable price, Morton says no. "It would suggest they paid an awful lot for it." As in any business deal, that makes it all the more important to recoup one's investment. "If you wind up paying more for it than it's worth, it does put pressure on you to squeeze more profits out of the paper, or any other business for that matter."

It's likely that Paxton would have made deep cuts to the payroll regardless of the price. The Herald-Sun had a larger staff than the industry average for newspapers its size. But the high price may have fueled an urgency that led to the abrupt manner of the firings.

Less than an hour after the sale was closed last Monday, Paxton management began calling Herald-Sun employees aside and firing them. The employees were then escorted to the parking lot without being allowed time to say goodbye or gather their personal belongings. The process continued all day, with 43 firings at all levels of the company.

Van Essen says community outrage over the mass firings is unfounded--the community hasn't seen The Herald-Sun's financial reports. "If there's outrage, it's from people who haven't fully understood the facts. If you take that as a given [that the paper was losing money], and if you had invested in it, wouldn't you take steps to make it profitable?"

Most of Paxton's newspapers are in non-competitive markets--one-newspaper towns. The prospectus, many say, played down the competition with the N&O.

According to the Audit Bureau of Circulation's 2003 report, The N&O's average daily circulation was 170,100 and Sunday circulation was 210,000. In Durham County, the N&O's daily circulation was 9,100 and Sunday was 11,400. By contrast, The Herald-Sun's overall daily circulation was 50,000 and 56,000 on Sundays. Of that, 31,500 was in Durham County on weekdays and 35,000 on Sundays--demonstrating a higher penetration for the hometown paper.

Journalistic competition has remained strong between the two, but the N&O's Durham circulation has been declining since the late 1990s, partly as a result of cutbacks in the Durham office of the N&O, and partly, H-S boosters say, because of a talented group of reporters recruited by former executive editor Bill Hawkins.

Former President and Publisher David Hughey, the first to be fired Monday, would not comment this week on any financial details about the newspaper. But he says that, in general, newspapers in competitive situations sometimes need to accept lower profits. "The willingness to forgo normal earnings during an economic downturn for the good of the community and as an investment in the future is the hallmark of a responsible newspaper," he says.

Statements made by the new management suggest that Paxton's abrupt housecleaning was urgently necessary in order to keep the company afloat. "This is a newspaper that, frankly, in recent years has seen its expenses exceed its revenues," Ashley was quoted as saying in The Herald-Sun's Jan. 3 story on the ownership change. "Paxton Media Group is faced with what any new owner would be faced with--cutting costs."

Was the paper losing money? Or were its profits simply not up to industry standards?

Sources close to the company say it had been generating a profit for the last six months, and that the month of December had seen revenues 20 percent higher than December 2003.

Van Essen says that doesn't paint an accurate picture of the paper's financial health. "Ask about industry standard profits and profit margins. Were they half of what industry standard levels of profits were? Were they within shouting distance of industry standard levels? Those are the right questions to ask your source," he says. "Anybody who would have bought this newspaper would have made immediate and substantial changes to it."

Jock Lauterer, director of the Carolina Community Media Project at UNC-Chapel Hill, says he suspects claims that The Herald-Sun was losing money are "disingenuous." "They are claiming that they weren't profitable. I take issue with that. I think the Durham paper just wasn't as profitable as Paxton wanted it to be, and that's a big difference. Without having seen the books, I'm guessing that this was a profitable newspaper, just not 20-35 percent profit margins. That's what a lot of chains are expecting. As a former publisher, I'm chuckling, because that's a lot," he says. Besides, he adds, "Why would Paxton shell out that much money for a turkey?"

Financial commitments that may have driven down the paper's profit margins have been lifted since the sale. Most often cited is the income taken by E.T. Rollins and his two sons, Tyler and Lawson, who live outside the state. Then there is the debt paid to the rest of the Rollins family who sold their shares to brother E.T., Jr. back in the mid-'90s.

Rollo Taylor, a former Herald-Sun employee under now-deceased former publisher Steed Rollins, says rumors that the Rollins family drew a hefty salary have never been confirmed. "It is a dead secret on what they pay themselves," he says. "They can abuse the payroll as much as they like." But Taylor says any financial troubles the paper faces stem from another source. "What got this paper was the price of the management team they were paying, all of those executives over there making huge sums of money, much, much more than a 50,000-circulation paper should be making," he says. "They were way over-staffed at the management level. They had layers of management that were suffocating each other."

Some top management positions that were eliminated will not be re-filled, Paxton has said.

Van Essen says the Rollins family has been "hurt" by reports that suggest they did not take care of their management team through the terms of the sale. "The Rollins family provided generously for the four top managers in the event that they were not hired by the new owner, and they also revised and improved the severance policy for all the employees before the sale took place," he says. "There was an implication in one of the stories that somehow the Rollins family didn't take care of the top managers. The Rollins family paid substantially more in salary and overall compensation package for years to this management group and provided at least an average, if not above-average, severance package for them.

"And there was another implication that the Rollins family was taking out gobs and gobs of money over the years," he adds. "Nothing could be further from the truth."

Inside the building this week, Herald employees trudge on. "You know that scene in The Empire Strikes Back where Vader takes over the cloud city? That's what it's like," says one employee. "We're all looking for the escape pods. We're all trying to figure out how stuck we are." The latest round of newsroom layoffs took place last Friday. In contrast to the unceremonious walks to the parking lot that made news last Monday, Friday's dismissals were more humane. "Friday we were helping everyone load up the car," an employee says.

At the end of the day, editor Bob Ashley called a meeting of newsroom staff, according to sources inside the paper. He told some two dozen assembled that all the cuts in the newsroom had been made--everyone there could feel secure that they would have a job Monday morning. He thanked the staff for putting out a newspaper under tough circumstances.

"He actually opened up the floor to questions and answers," says a source still employed at the newspaper. "I'll give him a sliver of credit for that, because it was a hostile crowd."

Staffers asked Ashley to clarify the paper's financial situation: Was the paper on the verge of collapse, or did the new owners simply feel it needed to be more profitable? "He hemmed and hawed his way around that one," the source says. Ashley responded to questions about the firings by saying, "This is the way corporate wanted to do it,'" the source says. "You're talking to good news people and they have some hard questions and they didn't take the corporate brush-off as the answer."

"He said, 'I wanted to thank you for not tripping me as I walked by.' He's making an effort to lighten the mood and to integrate," the source says. Is it working? "I would say no." Gallows humor pervades the office. "Some of us came up with a new motto. Instead of 'Trusted and essential,' we've come up with 'Busted and eviscerated.'"

Former publisher Hughey has spent the past week helping former colleagues look for work. "I'm deeply moved by the community's outpouring of support as well as the newspaper industry's," he says. "This paper has a very strong reputation in the industry, and we've been known for our ability to attract some of the best talent." Those with skills that are not newspaper-specific, such as sales, marketing and information technology, are in a good position to find employment locally.

Ashley did not return calls for comment. But on Monday he appeared on the WUNC program The State of Things and assured listeners that the paper remains committed to local news. Of the 81 people fired, 17 were in the newsroom, according to a Herald-Sun report. The most prominent of those were editorial cartoonist and graphics editor John Cole, photographer Ross Taylor and columnist Jim Wise. Cole and Taylor are award winners in their professions, and Wise's columns about history and life in Durham are among the paper's most popular offerings.

On the radio program, Ashley said: "Actually, when the dust settles, the people who are actually on the street doing the reporting have been relatively untouched by this. I think there were really only two positions, really only one position that was a purely reporting position, that we ended up reducing. We had some reassignments and we'll have some realignments of people, but our intention was, and I think we'll succeed in managing to keep a lot of horsepower on the street."

That statement seems to contradict the actual roster of dismissed reporters, which include metro-desk reporter Michael Petrocelli, religion reporter Flo Johnston, food writer Al Carson and Wise. When I called the program to ask about that statement, Ashley clarified. "I think what I said at the beginning of the program was that the people who were on the streets actually reporting and writing local news were relatively less affected. I think there were only one, possibly two depending on exactly how we restructure some things, positions that were actually involved in reporting as opposed to writing columns or writing about specialized areas such as food."

Sources inside the paper explain that Petrocelli was the only metro reporter to be let go. Wise, Johnson and Carson were on the features desk. Business reporter Paul Bonner was brought over to metro. Ben Evans, a former metro reporter, left for another reporting job before Paxton's takeover and his position will not be filled.

Metro reporters will be expected to write 10 stories per week under new "guidelines," sources in the newsroom say, and the front page will feature three local stories each day.

"Normally this would be decided in the budget meeting [when newspapers decide which stories go where in the paper], and it would be a case of whichever stories are best are up front. I guess this is their way of proving to the public that they care about local news," the source says. Given the increased output expected from reporters, this could mean more local coverage overall. For the time being, however, "It doesn't look like they're actually doing more local stories; they're just moving them to the front page."

Another newsroom staffer sums up the collective feeling this way: "There's a feeling internally at The Herald-Sun now that quality is not an issue, as long as the Paxton bigwigs make as much money as possible. This is no way to run a newspaper. It's a great way to run a newspaper into the ground."

Van Essen says complaints about the paper's new ownership are unfounded. "Paxton is a very good newspaper company. You make yourself a little note to do a story about the newspaper a year from now, and I guarantee that it will be every bit as good as it is today. And you talk to the employees that are there a year from now and I guarantee that they'll like their owner a lot." Many of those who weren't cut last week, however, say they will try to move on. "Quite honestly, it's not even that we're worried about our jobs," says a newsroom staffer. "We're not sure that we want to work for this company anymore." Those employees with families have said they will try to weather the storm. "But I'm speaking for a large swath of people when I say, we don't want to work for these people anymore. We don't want to validate their particular corporate view of the world."